Like a Good Neighbor, Trade Usage is There

I was extremely fortunate to have been taught by some extraordinary professors.  From these individuals, I learned not only the substantive areas being taught, but some extremely effective teaching techniques.  Several significant substantive lessons came from Soia Mentshikoff, my UCC professor.  Dean Mentschikoff, as mentioned in an earlier post, was the Associate Chief Reporter to the Code.  As such, she was involved in the overall drafting of the UCC, a process which formally lasted for over a decade, but was actually twice that long. Her insight into ‘all things UCC’ was incredible. I listened intently to everything she said.

            There were three major points emphasized repeatedly throughout every class I took with Professor Mentschikoff, all of which have profoundly impacted my approach to the Uniform Commercial Code. Two are most relevant in this discussion. First, Dean Mentschikoff was emphatic in her belief that you ‘can’t spend too much time on the facts’.  In other words, ‘You need to know the facts. Cold.’ There were two major reasons why this was emphasized so strongly. First, is the fact that the majority of the Code is predicated upon factual assumptions which have repeated themselves over time.  Hence, when the facts of your case are superimposed upon the activated Code sections, the statute comes to life as to your situation.  The better the facts are known, and distilled, the more effective this process.

The second reason Dean Mentschikoff felt so strongly about the importance of the facts was her belief that, despite the winding road the law sometimes takes on its way to justice, the end result is usually correct and fair.  Courts want to achieve the right result, and will do so when the facts are thoroughly and properly presented, since the courts will achieve a common sense, reasonable result.

All of this ties into the definition of ‘Agreement’ and gathering the facts of a given case. I want to emphasize that this strategy applies to drafting documents as well as preparing cases.  The more thoroughly you understand the facts, and how the transaction is going to unfold, the better you can draft for contingencies.

                                    Summarizing Agreement

As of this point in our analysis of agreement, we have any language, written or verbal, as a core element of our factual foundation.  It must be borne in mind that in a litigation context, the other side will most certainly have a different version of the facts.  In the drafting context the process is not quite so adversary, but must be approached with equally intense focus.  Sometimes, important information is forgotten or withheld.

With ‘language’ having been roughly determined, we check to see if there is a ‘course of performance’ or a ‘course of dealing’.  As discussed in an earlier post, neither may be present.  At this point, we may have contested facts, and no course of dealing or usage of trade. 

Amidst all of this uncertainty there is one thing that can almost always be counted on to supply valuable information to any agreement under the Uniform Commercial Code: Trade Usage.  Commercial transactions take place within the context of an existing industry, 99 plus per cent of the time.  Within that industry, there is a manner of business so customary and fundamental to the industry, that it becomes part of the agreement between the parties, regardless of whether or not it is even discussed.   Trade usage is defined under Section 1-303(a) as follows:

A "usage of trade" is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.  Section 1-303(a).

There are over 86,000 trade and professional associations in the United States, each with their own way of doing business.  Many of these associations have publications which are filled with information regarding their industry. Individuals dealing in commercial transactions should take the time to review these journals, for this can be an invaluable resource in any situation.

The impact that trade usage can have in a case is dramatically illustrated in the case of   In Re: COTTON YARN ANTITRUST LITIGATION, 505 F 3d. 274 (4^th Cir., 2007).  At issue was whether or not plaintiff purchasers of cotton and poly-cotton yarn were required to submit their antitrust case to arbitration via an arbitration provision which, according to defendants, was part of the contract as a result of the regular and customary use of arbitration in the textile industry as a means of resolving disputes.  The facts can be briefly stated as follows:

Purchasers of cotton and poly-cotton entered into discussions with defendant Frontier for the purchase of the products noted.  Discussions leading up to the contract were conducted on the phone and included discussions of quantity, price, and delivery. These discussions were followed by a written contract, denominated ‘Sales Contract’ or ‘Confirmation’ which stated the contracts ‘were subject to the Yarn Rules’, and further that, absent specific agreement otherwise, the arbitration rule [the Yarn Rules] would govern all further transactions. 

The effect of this provision, if upheld, was to require that all claims be submitted to arbitration, including the antitrust violation. The contracts were sent by Frontier to the purchasers, but were not signed or returned to Frontier.

At issue on appeal was whether the district court’s ruling which excluded

arbitration for the antitrust claim was correct.  The district court based its reasoning on 2-207, essentially stating that the arbitration provision submitted in the Sales Contract and/or Confirmation was a ‘material alteration’ of the oral contract between the parties and hence a violation of Section 2-207(b)(2). This ‘material alteration’ according to the District Court, resulted in the arbitration provision not becoming part of the contract.

The court of Appeals reversed the District Court on the arbitration ruling.  The Court of Appeals found that the written confirmations were not ‘additions to the contract’.  The rationale was:

The "Yarn Rules" incorporated in the Frontier sales contracts and confirmations are a collection of "industry rules regarding contract terms and conditions and industry norms" that have been gathered and reported by the American Yarn Spinners Association for more than 50 years. J.A. 541. As to arbitration, the Yarn Rules state that "[p]arties to the sale and purchase of yarns are members of the textile industry, which has, for over fifty years, settled disputes by arbitration in accordance with the terms and conditions of contracts which have tended to become standard and in accordance with equity and good conscience and the customs and practices of the trade." J.A. 542-43. Thus, the Yarn Rules themselves are strong evidence that arbitration is a usage of trade in the textile industry [Emphasis added] In re Cotton Yarn at 283.

After discussing case law which recognized arbitration as the standard manner of resolving disputes in the industry, the court held that the arbitration provision was automatically part of the contract between the parties as a result of arbitration being a trade usage in the textile industry.  This was true regardless of the fact that it was never formally agreed to by the purchasers.  The court further found that a party’s knowledge of a trade usage, or lack thereof, is irrelevant, a result which is clearly consistent with the text of the statute.

If you are involved in drafting or analyzing contracts in the business world, it is imperative that a basic understanding of the norms of the trade of any industry be understood.  Otherwise, you may have agreed to terms of which you have no knowledge and which, down the road might be extremely important.  If you are already in litigation, you are certain to gain valuable insight from the journals into the trade as well.

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